Simple Indicator Pins Down Forex Profits

06/27/2012 6:00 am EST

Focus: FOREX

Huzefa Hamid

Senior Analyst, DailyForex.com

Huzefa Hamid, contributor to DailyForex.com, explains how he uses a simple candle indicator to find money-making currency trades.

One of the key entry criteria I use regularly is the pin bar. This is a simple bar or candle that is very easy to recognize visually.

The definition for a pin bar is: “The open and close must be in the top third or the bottom third of the bar. Therefore, the tail must make up two thirds of the entire candle size. Also, the open and close of the pin bar has to be within the range of the high and low of the previous bar.”

(My definition for a pin bar is slightly different from the more standard definitions you may have read from other sources. Notice also I’m not concerned if the candle’s open is higher than its close.)

Visually, the pin bar candle looks something like this:

chart
Click to Enlarge

It’s pretty easy to spot on a chart. Essentially, you’re looking for a candle with a relatively long tail and the open and close of that candle to be within the previous bar’s range. That’s it.

Conceptually, this candle reflects a reversal in momentum. For example, with a bearish pin bar, the price opens and then moves up rapidly, but it rejects the price levels above. It moves back down to close near its open and near the bottom of the range of the bar.

A pin bar by itself, however, doesn’t mean that we should just enter a trade automatically. It has to tie in meaningfully with the surrounding price action.

Let’s get right to an example. This trade was one that we called in our live room earlier in the week based on a pin bar on the 15-minute EUR/JPY chart.

chart
Click to Enlarge

The price had run up rapidly and then began to trade in a range. After marking out a resistance, the price produced a pin bar (highlighted in grey). The high of the pin bar (marked on the above chart by the red dotted line) matched the previous resistance within a couple of pips.

We entered short at the open of the next candle. The stop loss was just above the high of the pin bar (17 pips); the trade netted +48 pips.

The reversal indicated by a pin bar matched previous resistance and allowed us a safe entry near the very beginning of a downtrend.

In summary:

  1. A pin bar is a candle with a long tail and the open and close either in the top or bottom third of the bar. It marks a potential reversal in price.
  2. A pin bar must be viewed in context of the surrounding price action and trades based on it must have the usual risk/reward considerations.

By Huzefa Hamid, co-founder, The Forex Room

The Forex Room is a service that calls live trades to capture dozens of pips daily with low drawdown.

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